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IA 4: Using loss balances carried forward to tax year
or “How to use past losses to reduce your current tax”
You could also call this:

“Companies must maintain 49% ownership to carry forward tax losses”

This law is about how companies can carry forward their tax losses. You need to understand a few things about this:

A company can only carry forward its tax losses if the same group of people owns at least 49% of the company during a certain period. This period starts from the tax year when the loss happened and ends in the tax year when the company uses the loss.

If the company’s value is based on the market, then the same group of people must also own at least 49% of the company’s market value during this period.

If a company can’t carry forward its losses because of these rules, it might be able to use other sections of the law to carry forward some or all of the losses.

There’s also a rule that can stop a company from carrying forward losses if it looks like they’re trying to cheat the system.

The law defines some important terms:

  • The ‘continuity period’ is the time from when the loss happened to when it’s used.
  • The ‘minimum market value interest’ is the lowest amount of the company’s market value a person owns during this period.
  • The ‘minimum voting interest’ is the lowest amount of voting power a person has in the company during this period.

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Next up: IA 6: Restrictions on companies grouping tax losses

or “Rules for companies sharing tax losses within a group”
Next

Part I Treatment of tax losses
General rules for tax losses

IA 5Restrictions on companies’ loss balances carried forward: continuity of ownership

  1. A company's tax loss component is carried forward in a loss balance only if the minimum continuity requirements of subsections (2) and (3) are met. The tax loss component includes an unused tax loss component carried forward from an earlier income year.

  2. A tax loss component is carried forward in a loss balance under section IA 3(4) only if a group of persons holds for the continuity period minimum voting interests in the company that add up to at least 49%.

  3. If a market value circumstance exists for the company at any time during the continuity period, the group of persons must also hold for the continuity period, minimum market value interests in the company that add up to at least 49%.

  4. If a tax loss component cannot be carried forward because the requirements of subsections (2) and (3) are not met, the company may apply section IB 3, IP 3, or IP 3B (which relate to the carrying forward of tax losses for companies) to determine whether some or all of the tax loss component is carried forward in a loss balance.

  5. Section GB 3 (Arrangements for carrying forward loss balances: companies’ ownership) may apply to treat a company as not meeting the requirements of subsection (2) or (3).

  6. In this section,—

    continuity period means the period of time from the start of the income year that corresponds to the tax year in which a tax loss component is included in the tax loss to the end of the income year that corresponds to the tax year in which the company uses the tax loss component

      minimum market value interest, for a person and a continuity period, means the lowest market value interest they have in the company during the continuity period

        minimum voting interest, for a person and a continuity period, means the lowest voting interest they have in the company during the continuity period.

        Compare
        Notes
        • Section IA 5 heading: replaced (with effect on 1 April 2020), on , by section 96(1) of the Taxation (Annual Rates for 2020–21, Feasibility Expenditure, and Remedial Matters) Act 2021 (2021 No 8).
        • Section IA 5(1): substituted (with effect on 1 April 2008), on , by section 57(1) of the Taxation (Consequential Rate Alignment and Remedial Matters) Act 2009 (2009 No 63).
        • Section IA 5(4): substituted (with effect on 1 April 2008), on , by section 57(2) of the Taxation (Consequential Rate Alignment and Remedial Matters) Act 2009 (2009 No 63).
        • Section IA 5(4): amended (with effect on 1 April 2020), on , by section 118(1) (and see section 118(2) for application) of the Taxation (Annual Rates for 2021–22, GST, and Remedial Matters) Act 2022 (2022 No 10).
        • Section IA 5(4): amended (with effect on 1 April 2020), on , by section 96(2) (and see section 96(4) for application) of the Taxation (Annual Rates for 2020–21, Feasibility Expenditure, and Remedial Matters) Act 2021 (2021 No 8).
        • Section IA 5(5): amended (with effect on 1 April 2020), on , by section 96(3) of the Taxation (Annual Rates for 2020–21, Feasibility Expenditure, and Remedial Matters) Act 2021 (2021 No 8).
        • Section IA 5(6) minimum market value interest: amended (with effect on 1 April 2008), on , by section 57(3)(a) of the Taxation (Consequential Rate Alignment and Remedial Matters) Act 2009 (2009 No 63).
        • Section IA 5(6) minimum voting interest: amended (with effect on 1 April 2008), on , by section 57(3)(b) of the Taxation (Consequential Rate Alignment and Remedial Matters) Act 2009 (2009 No 63).